Understanding the ABCs of HSAs, FSAs and HRAs

By Barbara Borczak, CPA, MST

It’s never been easy to get the benefit of a tax deduction for your medical expenses. Now that the standard deduction has been increased to $24,000 for married couples filing jointly, it’s even less likely. It’s important to understand and leverage the tax-advantaged ways to fund these expenses, including HSAs, FSAs and HRAs.Here’s a quick guide to help you make sense of this alphabet soup of health care accounts:HSAsIf you’re covered by a qualified high-deductible health plan (HDHP), you can contribute your pretax earnings to an employer-sponsored Health Savings Account (HSA) — or make tax deductible contributions to an HSA you set up yourself. The limit for self-only coverage in 2018 is $3,450; for family coverage the limit is $6,900. If you’re age 55 or older, you may contribute an additional $1,000.You own the account, which can bear interest or be invested, growing tax-deferred like an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.FSAsYou don’t need to be covered by an HDHP to take advantage of an employer-sponsored Flexible Spending Account (FSA). This option allows you to redirect pretax income – up to $2,650 in 2018 – to a plan that pays or reimburses you for your qualified medical expenses.Unlike an HSA, any contributions you don’t use by the end of the plan year, you generally lose. Your plan might allow you to roll over up to $500 from one year to the next. Or it could give you a grace period of two and a half months to use up your previous year’s contribution. But these plans aren’t designed or intended to give you the benefit of tax-deferred growth.A FAQ about FSAs is whether they can be used tandem with HSAs… The answer is “maybe”. If you have an HSA, you can contribute to a limited purpose FSA that covers dental, vision, and other eligible expenses, but not medical or prescription drugs costs.A dependent care FSA can always be used in conjunction with an HSA.HRAsA Health Reimbursement Account (HRA) is an employer-sponsored account that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year.There’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.Maximize the BenefitIf you have one of these health care accounts, it’s important to understand the applicable rules so you can get the maximum benefit from it. Talk to your employer to make sure you understand all the opportunities they can offer you – and if you’re an employer, talk to your employees to find out which options are important to them.And always talk to your tax accountant. These tax-advantaged accounts aren’t the only vehicles to save tax dollars in relation to health care costs.